The High Cost of Low Credit Scores

By AnnaMaria Andriotis

Borrowers with shaky credit can qualify for a car loan, but they’ll pay a steep price. Roughly 44% of car loans originated during the first quarter of 2012 were given to subprime consumers, meaning those with scores lower than 680 (based on the so-called PLUS range of 330 to 830), according to the latest report by Experian. That’s up nearly 6% from a year prior.

Interest rates on car loans vary significantly based on the borrower’s score. The best borrowers who have at least a 740 score pay 3.2% interest on average on new car loans and borrowers with 680 to 739 scores pay 4.5%, according to Experian. Borrowers with lower scores could pay anywhere from 6.5% and 12.9% on average.

The difference adds up: On a $10,000 five-year (the average term) new car loan at a 3.2% rate, monthly payments will be about $181 – with some $860 in interest paid over the life of the loan. At 12.9%, payments are around $227 per month, or $3,620 in interest over five years – an extra $2,760 compared to the borrower with pristine credit.

Credit scoreS play a very important role in our financial life, good credit score can make this life great, while bad one may bring us lots of inconveniences. That’s why it’s better to start to take care of credit history as only financial life starts. I know some people with a bad credit score and they wrongly assume that once their credit score is damaged then then they can’t do a thing to fix it. It’s very important to be responsible about making payments on loans, because credit score shows the lenders of cash advance how reliable you are. To my mind, it’s never too late to work on a credit score and take advantage of low interest rates and other benefits which are affordable for people with high credit score only.

1:29 pm July 27, 2012

Bankruptcy Shop wrote:

So many Americans do not live within their means. In order to keep up with Joneses, many people bought houses they couldn’t afford so when the recession hit, they lost their homes to foreclosures and had to file bankruptcy. Post-bankruptcy, these people may start thriving if they live within their means.

About Real-Time Advice

How breaking news — in the markets, Washington, and around the world — affects you and your money. Have a question about how current events may change your financial future? Email us at ask@smartmoney.com.